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Legal Updates | Real Estate Disputes in Indonesia

“Real estate” is a very broad subject that touches many aspects of Indonesian law, e.g., administrative law, environmental law, construction law, civil law, agrarian/land law, etc. There is no arbitration facility or process specifically designed to accommodate real estate matters under Indonesian law. Disputes related to real estate are treated in a similar manner as any other dispute in Indonesia.

Concerning dispute settlement through arbitration, Indonesia has enacted Law No. 30 of 1999 regarding Arbitration and Alternative Dispute Resolution (“Arbitration & ADR Law”). Under the Arbitration & ADR Law, parties may resolve a dispute through arbitration only after they have agreed to arbitration as the dispute settlement mechanism. For agreements, including agreements related to real estate (e.g., construction agreements or lease agreements over building or office space), the parties will usually insert an arbitration clause if they prefer arbitration as a means to settle any disputes arising from such agreements.

The most widely recognised national arbitration body in Indonesia is the Indonesian National Arbitration Board (Badan Arbitrase Nasional Indonesia or “BANI”). When a foreign counterpart is involved, the parties often choose an international arbitration body such as the Singapore International Arbitration Centre (“SIAC”) or the International Chamber of Commerce (“ICC”) to settle their dispute.

The rules of the arbitration depend on the parties’ agreement. As an illustration, if the parties choose BANI to resolve their dispute, the process is (i) submission of an application for a notice of arbitration, (ii) response to the notice of arbitration, (iii) appointment of arbitrator(s), (iv) payment of the arbitration fees, (v) examination of the case, (vi) proceedings, and (vii) award. 

SIAC, ICC, and other arbitration bodies have different proceeding rules and the parties to an agreement are free to determine which rules they wish to use in the event of a dispute.  Indonesia recognises the enforcement of foreign arbitral awards, as Indonesia is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which has been ratified according to Presidential Decree No. 34 of 1981. Foreign arbitral awards must be registered at the Central Jakarta District Court for the purpose of execution.

Disputes in the Real Estate Sector

Land disputes are the most common disputes related to real estate matters. There are many reasons for this; real estate developers often face difficulties in the land procurement process for real estate developments. Land disputes vary, and include competing claims of ownership over a portion of land, disputes with disgruntled local communities that oppose a development, falsification of or incorrect information on a land certificate, and even issues of criminal liability.

In Indonesia, there are portions of land that are already certificated and those that are not yet certificated. The procurement of uncertificated land, commonly known as adat (customary) land, is more prone to disputes. Due to the lack of a clear certificate from the National Land Office (Badan Pertanahan Nasional or “BPN”), the authorised government agency in charge of administering land in Indonesia, tracing the actual owner of adat land can be difficult and more than one party may claim ownership of the land. It is not uncommon, for example, for one party to claim ownership of land by inheritance and another party to claim ownership of the same land because he or she has occupied the land for a long time. Demarcation of the boundaries of adat land is another source of dispute. 

Adat land, when acquired by a party, including a developer, is certificated in accordance with the prevailing regulation. Even when a land certificate is obtained from BPN, the risk of dispute still exists. Other parties could challenge and seek the annulment of the land certificate if they deem its issuance unlawful, e.g. if another land certificate was previously issued to another party for the land, the previous land owner committed fraud by selling the same land to more than one party, providing incorrect information to BPN for the land certificate, etc. Under the prevailing regulation, a land certificate cannot be challenged after five years from the issuance of the land certificate in the name of a landowner who obtained the land in a valid manner.

Such land disputes are often settled either by arbitration or court proceedings. For court proceedings, the type of land dispute determines to which court the matter is submitted for settlement, depending on the specific authorities of Indonesian courts. For example, a challenge to the lawfulness of a land certificate issued by BPN will be submitted to the administrative court, which has the authority to annul unlawful certificates and licenses. Equally, it is common for land disputes to be brought for civil court proceedings by tort.

The above are only several examples of the type of land disputes that frequently affect real estate development in Indonesia and are far from a comprehensive list. There are also, for example, construction work disputes involving developers/contractors. Parties to a construction contract may choose foreign court proceedings for dispute settlements.  However, Indonesia does not recognise the enforcement of foreign court judgments as the country is not a party to a convention for such enforcement.

Court Proceedings for Real Estate Disputes

There are three types of legal proceedings in Indonesia relevant to the real estate sector, namely civil court proceedings, administrative court proceedings, and criminal court proceedings. Civil court proceedings handle issues related to either a breach of contract or tort. Administrative court proceedings deal with claims by parties concerning the issuance of a decree, permit, license, or other forms of approval by the government. Criminal court proceedings deal with the determination of criminal acts.

Aside from the above, land inheritance disputes may also involve proceedings in (i) the religious court for inheritance under Islamic law and (ii) civil court for inheritance under non-Islamic law.

The benefit of court proceedings is that court fees and expenses related to handling a dispute are low. Another benefit, particularly for civil court proceedings, is that the procedural mechanisms require the parties to enter a mediation process before the proceeding advances to its merits. This provides the opportunity for a dispute to be settled amicably between the parties without a court judgment.

This does not fall under the category of benefit, but administrative court and criminal court proceedings are necessary because the issues these courts have jurisdiction over (administrative and criminal law) cannot be resolved by any other means, such as arbitration or alternative dispute resolution.

As to drawbacks, court proceedings in Indonesia tend to be lengthy. It can take up to two years to reach a final and binding decision, bearing in mind that the decision of a lower court can be appealed to a high court, and a cassation can be filed for with the Supreme Court.  For real estate developers, exposure of their involvement in court proceedings can cause damage to their reputation and good name.

Alternative Dispute Resolution for Real Estate Matters

Under the Arbitration & ADR Law, alternative dispute resolution (“ADR”) is defined as a dispute resolution mechanism agreed to by the parties that does not involve court proceedings, as a result of consultation, negotiation, mediation, conciliation, or expert assessment. Unfortunately, the Arbitration & ADR Law does not define each of these ADR methods. The Arbitration & ADR Law tends to leave the mechanisms for ADR up to the parties involved, but it does stipulate that the result of any settlement through ADR must be made in a written agreement and be registered with the relevant district court within 30 days after the execution of such agreement.

The advantage of ADR is that it allows a dispute to be settled without having to use the courts. The drawbacks of court proceedings as explained above can be avoided if ADR is applied. Dispute settlement through ADR also respects the confidentiality of the parties related to the dispute. 

The disadvantage of ADR is that the rules of ADR are not well established in Indonesia. As an indication of this, only one out of 82 articles in the Arbitration & ADR Law, namely Article 6, regulates the mechanisms of ADR.

However, as indicated above, when a party submits a claim through a civil court it must first enter mediation in an attempt to reach a dispute settlement. This form of mediation is precisely regulated in Supreme Court Regulation No. 1 of 2016 regarding Mediation Procedure in Court.

ADR and Large Real Estate Disputes

It is rare for large real estate disputes to be resolved by ADR, simply because ADR methods are not well established in Indonesia (as discussed above). Negotiation is of course first sought to prevent any dispute from occurring. When negotiation fails, real estate disputes, especially land-related disputes, are often brought directly to court proceedings.

Out-of-court mediation (mediation outside the required mediation process in a civil court proceeding) may be the best alternative dispute resolution mechanism to prevent a dispute going to court. In a recent development, the Indonesian Minister of Agrarian Affairs and Spatial Planning, who is also the head of BPN, has publicly promoted the use of mediation to settle land disputes. BPN has recently put in place internal regulations and guidelines for the mediation of land disputes. These regulations and guidelines are silent as to whether there will be any fees involved for the mediation of land disputes.

SSEK - 23rd August 2016

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Indonesia Snapshot

Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)